Paper T6(INT)

Drafting Financial
Statements
(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 4 JUNE 2007

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

hall

The Association of Chartered Certified Accountants

ALL FOUR questions are compulsory and MUST be attempted

1 You are provided with the following financial statements for Bicepts, a limited liability company, and its subsidiary
Tricepts:
Income statements for the year ended 31 May 2007
Bicepts Tricepts
$000 $000
Sales Revenue 135,000 74,000
Cost of sales (70,000) (30,000)
–––––––– ––––––––
Gross profit 65,000 44,000
Distribution costs (7,500) (6,200)
Administrative expenses (19,000) (7,784)
–––––––– ––––––––
Profit from operations 38,500 30,016
Income from Tricepts: Loan note Interest 4 –
Dividends 6,400 –
Interest payable – (16)
–––––––– ––––––––
Profit before tax 44,904 30,000
Income tax expense (10,000) (9,000)
–––––––– ––––––––
Profit for the period 34,904 21,000
––––––––
–––––––– ––––––––
––––––––
Balance Sheets as at 31 May 2007
Bicepts Tricepts
Assets $000 $000 $000 $000
Non-current assets
Property, plant and equipment 80,000 39,050
Investments:
$1 ordinary shares in Tricepts at cost 24,000 –
Tricepts loan notes 50 –
–––––––– –––––––
104,050 39,050
Current assets
Inventory 10,630 4,498
Receivables 18,460 12,230
Bank 3,400 32,490 1,344 18,072
––––––– –––––––– ––––––– –––––––
Total assets 136,540 57,122
––––––––
–––––––– –––––––
–––––––
Equity and liabilities
Capital and Reserves
$1 Ordinary shares 70,000 25,000
Retained earnings 37,540 15,000
–––––––– –––––––
107,540 40,000
Current liabilities
Payables 6,000 1,922
Tax 11,000 7,000
Dividends payable 12,000 29,000 8,000 16,922
––––––– –––––––
8% Loan note – 200
–––––––– –––––––
Total equity and liabilities 136,540 57,122
––––––––
–––––––– –––––––
–––––––

2
The following information is also available:
(i) Bicepts purchased 80% of the $1 ordinary shares in Tricepts on 1 June 2006. At that date Tricepts’ retained
earnings were $2,000,000.
(ii) Bicepts’ annual impairment review of goodwill on acquisition of Tricepts valued it at $1,800,000 at 31 May
2007.
(iii) During the year ended 31 May 2007 Bicepts sold goods which originally cost $8,000,000 to Tricepts for
$12,000,000. Tricepts still had 25% of these goods in inventory at 31 May 2007.
(iv) Tricepts owed Bicepts $1,800,000 at 31 May 2007 for some of the goods Bicepts supplied during the year.
(v) Bicepts owns $50,000 of Tricepts’ loan notes. The interest is paid annually in arrears at 31 May. Interest for the
year ended 31 May 2007 is included in Tricepts’ payables. Bicepts has also included the interest in its
receivables.
(vi) All dividends were declared, but not paid prior to the year end.

Required:
(a) Calculate the goodwill arising on the acquisition of Tricepts. (3 marks)

(b) Prepare the following financial statements for Bicepts:

(i) the consolidated income statement for the year ended 31 May 2007. (10 marks)
(ii) the consolidated balance sheet as at 31 May 2007.
Note: A working should be included for the retained earnings. Disclosure notes are not required.
(19 marks)

(c) Explain the accounting treatment of intra-group trading in consolidated accounts. (3 marks)

(35 marks)

3 [P.T.O.
2 J Moor and P Croft have been trading independently as sole traders. They have decided to form a partnership called
Moorcroft from their existing businesses. The future profit sharing ratio in the new business will be 2:1 to J Moor and
P Croft respectively.
The balance sheets of the sole trader businesses at the date of the formation of the partnership were as follows:
Balance sheets as at 31 May 2007
J Moor P Croft
Assets
Non-current $ $ $ $
Property 25,000 –
Plant and machinery 14,000 16,000
Motor vehicle – 7,000
––––––– –––––––
39,000 23,000
Current assets
Inventory 5,000 4,000
Trade receivables 1,500 1,300
Cash at bank 1,000 7,500 3,000 8,300
––––––– ––––––– ––––––– –––––––
Total assets 46,500 31,300
––––––– –––––––
Capital and liabilities
Capital accounts
Moor 35,000 –
Croft – 23,300
Current liabilities
Trade payables 7,000 8,000
Loan from Dodd 4,500 –
––––––– –––––––
Total capital and liabilities 46,500 31,300
–––––––
––––––– –––––––
–––––––
Additional information
At the date of formation of the partnership:
(i) the property belonging to J Moor was revalued at $30,000.
(ii) the motor vehicle was retained by P Croft and not transferred to Moorcroft.
(iii) J Moor’s inventory was revalued at $4,500.
(iv) the plant and machinery belonging to P Croft was revalued at $14,500.
(v) J Moor agreed to take personal responsibility for the loan from Dodd.
(vi) goodwill was agreed to be $12,000 for J Moor and $9,000 for P Croft.
(vii) all the trade payables and trade receivables were taken over by Moorcroft at their book values.

Required:
(a) Prepare the following accounts for both J Moor and P Croft as they would appear on the closing of their sole
trader businesses:
(i) Revaluation accounts; (5 marks)
(ii) Capital accounts. (5 marks)

(b) Prepare the balance sheet of Moorcroft immediately following the formation of the partnership.
Note: goodwill is not carried in the balance sheet.
(10 marks)

(c) Explain briefly how partnership goodwill is calculated and why it needs to be recalculated when a new
partner joins a partnership. (5 marks)

(25 marks)

4
 This is a blank page.
Question 3 begins on page 6.

5 [P.T.O.
3 Acoms is a small business with limited liability. Its summarised financial results are given below:
Acoms
Income statement for the year ended 31 May 2007
$000
Revenue 375
Cost of sales (280)
––––
Gross profit 95
Distribution & administrative expenses (45)
––––
Profit from operations 50
Finance costs (5)
––––
Profit before tax 45
Income tax expense (15)
––––
Profit for the period 30
––––
––––
Acoms
Balance sheet as at 31 May 2007
$000 $000
Assets
Non-current assets 410
Current assets
Inventory 96
Trade receivables 34
Cash and bank 3 133
––––– –––––
Total assets 543
–––––
–––––
Equity and liabilities
Capital and reserves
$1 Ordinary shares 300
Retained earnings 90
–––––
390
Current liabilities
Trade payables 88
Taxation 15 103
–––––
Non-current liabilities
10% Loan notes 50
–––––
Total equity and liabilities 543
–––––
–––––
Additional Information
The following are ratios for Acoms for the year to 31 May 2006 and the industry average ratios for 2007:
Acoms Industry Average
Ratio 2006 2007
Gross profit percentage (%) 34·7 30·0
Net profit percentage (%) 17·7 20·0
Current ratio 1·5 1·5
Acid test (Quick) ratio 1·1 1·0
Receivables collection period (days) 16·0 20·0

6
 Required:
(a) Calculate the following ratios for Acoms for the year ended 31 May 2007. State clearly the formula used for
each ratio.
(i) Gross profit percentage
(ii) Net profit percentage
(iii) Current ratio
(iv) Acid test (Quick) ratio
(v) Receivables collection period (5 marks)

(b) Use the information given and the ratios you calculated in part (a) to comment on the performance of Acoms.
(10 marks)

(c) State five limitations of ratio analysis. (5 marks)

(20 marks)

4 Required:
(a) State the role of each of the following bodies:
(i) International Accounting Standards Committee Foundation
(ii) International Accounting Standards Board (IASB)
(iii) International Financial Reporting Interpretations Committee (IFRIC)
(iv) Standards Advisory Council (SAC) (4 marks)

(b) Identify and explain the four qualitative characteristics of financial information that are currently included in
the IASB’s Framework for the Preparation and Presentation of Financial Statements. (10 marks)

(c) Discuss the problems with using historical cost accounting during a period of rising prices and explain how
these problems may be overcome. (6 marks)

(20 marks)

End of Question Paper